Trio Of Reasons To Avoid Tesla: Musk, Slowing Sales, Scant Cash

The twists and turns of Tesla’s (NASDAQ:TSLA) tortuous story are becoming overwhelming for investors and analysts who follow the stock. This is a company with a promising product, electric cars, run by a terrible manager, Elon Musk. This reality was brought into stark relief by the events of the past couple of weeks, raising serious questions about whether it’s possible for Musk to lead the carmaker during its most crucial stage of evolution.

On March 10 Tesla, through a blog post, backtracked on its major marketing strategy, saying it now intends to keep a large number of its showrooms open and would increase prices of its expensive models by 3%. This came just 10 days after Tesla announced that it planned to wind down all but a small number of its stores in a bid to cut costs as it tries to introduce a cheaper version of its Model 3 Sedan, the automaker’s first mass-manufactured car.

“Shifting all sales online, combined with other ongoing cost efficiencies, will enable us to lower all vehicle prices by about 6% on average, allowing us to achieve the $35,000 Model 3 price point earlier than we expected,” Tesla said on Feb. 28. The abrupt decision to close its retail stores was hard to stomach for both its employees and investors. No matter how digitally savvy Tesla’s fans are, it would be naive to think that its cars would attract a large number of buyers without a brick-and-mortar presence.

Musk’s habit of sending half baked and sometimes wrong information through his Twitter feed remains an ongoing issue, one that’s seriously tarnished his image. It’s also led to a securities fraud lawsuit from the Securities and Exchange Commission.

We believe these latest events clearly show a company in financial distress. Trading at $288.96 at yesterday’s close, Tesla shares have lost about 6% of their value in the past month, and 7% since the start of 2019, which demonstrates the nervousness of investors who now increasingly believe Tesla is making decisions on the fly and reacting to challenges without deep-thinking.

Tesla Weekly Chart

Shrinking Cash Cushion

At the center of this nervousness and haphazardness, in our view, is the company’s small cash cushion, which risks being depleted amid a considerable slowdown in its car sales. The economics for any car maker are very simple: sell cars at high volumes with margins that are enough to justify the huge investments made.

For Musk, this basic equation is getting harder and harder to achieve in a global market where growth is coming under pressure. According to InsideEVs, a blog which Musk has repeatedly cited in his Twitter posts, Tesla sold about 5,750 Model 3s in February and 6,500 in January, a significant reduction from a record 25,250 in December. This bearish spell hit just as the federal tax credit available to Tesla buyers was reduced to half from Jan.1.

Tesla had about $3.7 billion of cash and equivalents as of Dec. 31, before it made bond payments of $920 million on March 1, the largest debt payment to date in Tesla’s almost 16-year history. If Tesla car sales continue to slow in North America and if Musk’s European and Chinese sales plans don’t materialize the way he is hoping, it’s likely that the company’s shares will face even greater trials in 2019.

Selling its Model 3 in Europe and China is important for Tesla to counter a slowdown in North America. “We’re excited to bring Model 3 to Europe and China early next year, given that the market for midsize premium sedans in those regions is even larger than in North America,” Musk said during the October earnings call according to Bloomberg.

Bottom Line

In line with our earlier view, Tesla is too big a battleground for investors to handle. With the company’s small cash reserves, its marketing strategy in trouble, and its CEO in a constant battle with the U.S. regulator, we don’t see Tesla shares stabilizing anytime soon.

On the contrary, we see a lot of risks to the downside if the global economy continues to slow and car sales don’t pick up in North America. With these uncertainties on the horizon, we believe it would be better to steer clear of Tesla.